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Thursday, October 29, 2020

As markets surge, govt flags concern: dodgy transactions may be slipping past

The Financial Intelligence Unit-India (FIU-IND), the agency under the Department of Revenue that analyses information on suspect financial transactions, met with more than 20 leading stockbroking firms over video link in August.

Written by Sandeep Singh | New Delhi | Updated: October 3, 2020 7:45:20 am
The reporting of suspicious transactions leads agencies to investigate and identify potential tax evasion and money laundering.

Amid a surge in investor inflows that have pushed stock market indices to new highs over the past six months, the Finance Ministry has flagged specific concerns over “low filing” and “poor quality” of Suspicious Transaction Reports (STRs) by brokers.

The Financial Intelligence Unit-India (FIU-IND), the agency under the Department of Revenue that analyses information on suspect financial transactions, met with more than 20 leading stockbroking firms over video link in August.

The FIU is learnt to have communicated that principal officers of at least four brokerages — Zerodha Broking, Motilal Oswal Financial Services, Reliance Securities, and RKSV Securities India — would be subsequently called to a separate meeting where they would have to explain their efforts on filing following the meeting in August.

Sources said some brokerages had filed very few STRs. Financial institutions are generally required to file an STR to the FIU within seven days of a suspicious transaction.

“The fact that brokerage houses with a large number of clients have reported minuscule numbers of STRs indicates that brokers may be shielding their clients transactions,” said an industry insider who did not wish to be named.

The reporting of suspicious transactions leads agencies to investigate and identify potential tax evasion and money laundering. The FIU is the Indian counterpart of the Financial Crime Enforcement Network (FinCEN) of the United States Department of the Treasury, which leads the global battle against money laundering.

Explained| Swiss Leaks, Panama Papers, now SARs: bank reports that alert law-enforcement agencies

Last month, The Indian Express, as part of a global investigation on the ‘FinCEN Files’ reported on suspicious activity reports (SARs) filed by banks in the US with the FinCEN. In more than 2,100 SARs, the banks had flagged suspicious transactions of over $2 trillion, including transactions worth at least $1 billion that were routed through 44 Indian banks. These are confidential filings – so secret that banks are not allowed to even confirm their existence – and there is no way to establish whether these transactions were also flagged by Indian banks in their STR filings with the FIU.

STRs with the FIU-IND are filed under the Prevention of Money Laundering Act (PMLA). After analysing the suspicious transactions, the FIU loops in law enforcement agencies such as the Enforcement Directorate, Central Bureau of Investigation, and Department of Income-Tax to investigate potential money laundering, tax evasion, or financing of terrorism.

India’s stock markets have seen vigorous investor activity over the last six months. Investor accounts with Central Depository Services (India) Limited (CDSL) grew from 2.12 crore at the end of March to 2.5 crore by the end of August, an addition of 7.6 lakh investors every month on average during this period.

At the meeting, FIU officials flagged both low STR filing numbers in general and the poor quality of STRs filed by some brokers. The way forward was discussed in order to improve compliance, both qualitatively and quantitatively, in the filing of STRs.

Officials pointed out that companies were not putting in the required effort, and were hobbled by inadequate capacity and systemic deficiencies, sources said. They were advised to carry out greater due diligence on clients from sensitive locations, and to file an STR if there was a mismatch in income/net worth and trade/investment.

Principal officers of brokerage firms are learnt to have said at the meeting that they had, indeed been adhering to both the SEBI Act & Rules and the PML Act & Rules – however, clients were not updating their financials, and not cooperating in enhanced due diligence on their financials and source of income. The non-receipt of counter party details from depositories in off-market transactions too was restricting their view of suspicious activities, they said.

Banking experts, however, said that where clients do not share information, brokerage houses must flag the transactions in their reports without waiting.

Venu Madhav, COO at Zerodha, one of the at least four brokerages that are learnt to have been called for another meeting, said: “The August meeting was on broad expectations of FIU on STRs filed by brokerage houses. While the concerned official pointed out that the reporting numbers were not in line with FIU’s expectation, there was no specific concern with regard to STRs filed by Zerodha. A general guideline was laid down for industry players and the effort that they need to put in for that.”

Upstox, the broking arm of RKSV Securities, said: “As a policy we do not prefer to discuss our meetings with regulators in public. As a responsible corporate, adhering to our duties towards regulatory requirements is our top priority. We also wish to clarify that we have all the necessary procedures and policies in place in this regard.”

Motilal Oswal Financial Services said: “FIU has been in the process of discussing with many broking houses on how to improve the number of STR filings, including us. In fact, FIU will be conducting regular meetings with major brokers. In the last meeting, we along with other brokers, explained the criteria based on which FIU reports are filed, and they were satisfied.”

An email sent to Reliance Securities, the fourth brokerage learnt to have been called for a separate review, remained unanswered.

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